SEC crackdown on options in tech sector hits Intuit

QuickBooks parent and tax and small business software provider Intuit Inc. has become the latest in a series of companies to have the Securities and Exchange Commission question their stock-option grants.The regulator served Intuit with an informal inquiry notice in June, after a Center for Financial Research and Analysis report questioned Intuit's granting policies, and the company later announced that it had implemented a self-review.

"Our board of directors has formed a special committee of independent directors to conduct this internal review with the assistance of independent legal counsel and independent accounting support, and the review is underway and ongoing," the filing said.

The company said that it believes the financial statements in its quarterly report fairly present its financial condition, but added that, "There can be no assurance that we will not determine that we need to change our accounting treatment of stock options granted in prior periods, which may have a material adverse effect on our results of operations for those periods or other periods."

At press time, the SEC, along with the Justice Department and various other federal and state government divisions, had investigated and subpoenaed over two dozen companies, including anti-virus software providers McAfee and Symantec, over executive stock-option grants.

The companies are under the commission microscope to see if they in fact followed their stock-option grant policies filed with the SEC, or backdated the options.

Backdating is when the issuer finds a low point in its stock price to award the executive options at that price; as the stock rises, so does the value of the options.

"I think it's a general fact that in tech and in the consumer tech businesses that stock options for employees, not just executives, is a competitive factor and allows employees to be able to participate in a company's success. Also, it's a good thing to have employees vested in the company they are working for," said Harry Pforzheimer, vice president of communications at Intuit. "Our intent and desire is to comply with our own practices and those required by law, on any options we are giving."

By backdating their stock options to when an executive was officially hired, the companies are not necessarily committing a crime, provided that their policies and procedures filed with the SEC allow for it. If they don't allow for backdating, however, they risk class-action or tax-avoidance lawsuits.

Intuit began its own inquiry into its stock option grants after an educational report from the CFRA was published in May. In the CFRA study, 100 companies were surveyed for their stock-granting history before Sarbanes-Oxley regulations took effect.

"We manually went though these 100 companies' proxy statements since 2002, and tabulated all options granted. Then we said if, in three or more cases of option granting, that it was granted at or near a 40-day low, followed by a significant stock increase, it was flagged, and called them a higher risk. Intuit was not one of those companies [at a high risk], they had only one incident flagged, and so we pointed that one out," explained Marc Siegel, director of research at the CFRA.

Intuit was included in the report for awarding its previous chief financial officer, Greg Santora, backdated stock options that allowed him to reap millions when he resigned from the company.

On May 18, 2000, Santora was granted options to buy 100,000 shares of its stock for $26.125 per share, the lowest price for the company all year. In 2002, Santora made about $2.7 million after trading in his shares at $52.85 per share.

Today, under SOX, executive option grants must be reported to the SEC within two business days of the grant date. This step has relieved much of the backdating issues being investigated today, said Siegel. But even under SOX there is room for error, especially with smaller companies.

M.P. Narayanan and H. Nejat Seyhun, finance professors at the University of Michigan, analyzed data on option grants to officers and directors of publicly traded firms between Jan. 1, 2000, and Aug. 31, 2004. Their findings revealed that nearly a quarter of the 569,000 option grants reported to the SEC by insiders after SOX regulations went into effect on Aug. 29, 2002, were reported late, with 10 percent of the grants being reported more than one month after the required date. Smaller companies were the most likely to report their findings late.

"What the committee of reviews in a company needs to do is predetermine and set days on which to issue stock options for the entire year," said Robert Roussey, a CPA and professor of accounting at the University of Southern California. "This way there's no issue with backdating."

Unlike Intuit's informal investigation, rival anti-virus providers McAfee and Symantec have more serious issues with their granting policies. In June, McAfee received a subpoena that a formal SEC order of investigation into its options-granting policy was about to be conducted.

Also under scrutiny by the SEC is the job search engine site Monster.com, which was served with a subpoena by the U.S. Attorney's Office in Manhattan regarding stock-option grants, and is undergoing an internal investigation.

"I think it's kind of funny ... some companies who [backdated] and did it a lot may be companies that potentially have different management teams today, and so it's not going to be that big of a deal," said Siegel of the CFRA. "If a brand-new management team is in place and the investors like the management team and like their business model, I think that people will look through it. If it's the same management team, that may be a different story."

Symantec settles tax claims

Separately, Symantec has agreed to pay $36 million to settle a tax claim after an audit of its 2003 and 2004 fiscal years. The amount, excluding interest, is less than the Internal Revenue Service's initial assessment of about $100 million, the company said. Symantec is also appealing a separate claim for about $900 million in taxes connected to its purchase of Veritas Software in July 2005. The amount in dispute is for Veritas' 2000 and 2001 taxes.